Eric Fry

Woohoo!…U.S. stocks racked up their biggest quarterly advance since 1998! The Standard & Poor’s 500 Index soared more than 15% between March 31 and June 30 – lifting its year-to-date performance marginally into the black, and breaking a streak of six consecutive quarterly declines for the S&P 500, the longest since 1970.

This champagne-cork-popping performance obscures a few trends that should be worrisome to the celebrants. First, the S&P 500 has gained no ground whatsoever since May 8, the first trading day after the Federal Reserve triumphantly announced the results of its banking sector “stress tests.” Second, the BKX Index of financial stocks has DROPPED more than 16% since May 8. (As we have noted in prior editions of the Rude Awakening, the finance sector has been leading the overall stock market – both to the upside and downside – for the better part of four years. So the sluggish recent performance of the BKX Index is probably not a “nothing.”) Lastly, most gauges of investor sentiment – like the VIX Index of option volatilities – are flashing readings of extreme investor optimism. Typically, as contrary indicators, such readings presage a market selloff.

But even if we were oblivious to all of these “inside baseball” stock market indicators, we would find plenty of reasons to worry about the near-term prospects of the US stock market.

Yesterday’s headlines, alone, offered ample evidence that something is rotten in the state of the U.S. economy:

For starters, the Office of the Comptroller of the Currency announced a troubling jump in “prime mortgage” delinquencies during the first quarter. Secondly, the S&P/Case-Shiller Index of home prices continued to slide, both year-over-year and month-over-month. (But the rate of decline is slowing which, we are told, means that the housing market is “bottoming.” Maybe yes, maybe no. We been hearing these pronouncements almost every month since the housing market peaked in 2006). Lastly, the Conference Board disclosed that consumer’s are feeling blue once again. Consumer sentiment dropped sharply from the prior month.

It’s true that much of the economic data flying across the newswires are less bad than before. But they are not good in any absolute sense of the word. Economic distress is still ascendant from coast to coast, with very few exceptions. The only other ascendant trend is self-delusion.

In yesterday’s edition of the Rude Awakening, we examined the adulation and success the “big men” in America are currently enjoying…and we postulated that the very existence of this adulation indicates that the crisis is far from over. But maybe this analysis of ours is too wacky and unscientific for most Rude readers. So let’s take a hard look at the hard lives America’s little men (and women) are enduring.

A “little man,” loosely defined, is any worker in the United States who does not appear among the “Friends” on former Treasury Secretary Hank Paulson’s Facebook page. A secondary definition of “little man” would be any individual without Ben Bernanke’s cell phone number in his “Fave 5,” and/or any individual without a direct line of credit from the Federal Reserve.

“Everywhere one looks these days,” we observed in yesterday’s Rude Awakening, “the big men are looking pretty darn smart. Meanwhile, the little men are suffering like never before.”

In what Sarah Baxter of “The Sunday Times” of London calls a “Mancession,” American males are suffering a disproportionate share of financial distress. “The economic crisis is sweeping away men’s jobs at a faster rate than those of women in America,” Baxter relates, “heralding the onset of a so-called ‘mancession.’” The Wall Street Journal’s, Mark Penn, dubs the growing ranks of unemployed males, “GLBs” (Guys Left Behind), and suggests their sufferings bode ill for the future of the American economy.

Mansession of 2009

Picking up on the observations of Baxter and Penn, the Financial Times remarks:

“Men have lost almost 80% of the 5.1 million jobs that have disappeared in the US since the recession started. This is a dramatic reversal of the trend over the past few years, when the rates of male and female unemployment barely differed.”

This curious statistic may contain valuable a macroeconomic insight. Specifically, men are losing jobs because America’s metal-bending industries are atrophying.

“Men have been disproportionately hurt,” the Financial Times explains, “because they dominate those industries that have been crushed: nine in every 10 construction workers are male, as are seven in every 10 manufacturing workers. These two sectors alone have lost almost 2.5 million jobs. Women, in contrast, tend to hold more cyclically stable jobs and make up 75% of the most insulated sectors of all: education and health care.”

“The widening gap between male and female joblessness means many US families are solely reliant on the income the woman brings in,” the Financial Times concludes. This widening gap also means that America’s economy is becoming dangerously reliant on service and finance industries, rather than manufacturing industries.

To be sure, a paycheck is a paycheck, no matter whether a “Ms.” or a “Mr.” is cashing it…and a pink slip is a pink slip, no matter which gender is receiving it. But that’s not the whole picture. If the service-sector “Ms.” is cashing her paycheck, while the manufacturing-sector “Mr.” is receiving his pink slip, trouble is not far behind.

This is not a male-female thing; it is a national prosperity thing. Large economies cannot live on service industries alone. And large economies do not “recover” while their manufacturing industries are contracting. So, no, the U.S. economy is NOT recovering, no matter how many folks wish it were so.

Even if we look at the recent economic data through gender-neutral spectacles, we see a picture of national distress, not national recovery. We see soaring long-term unemployment, coupled with a subsistence-level consumer spending.

America’s “headline” unemployment rate is 9.4%, which is pretty darn bad. But America’s actual unemployment rate is more like 16%, which is a horrific. The chart below tracks the combined percentages of American workers who are: 1) unemployed; 2) partially employed, but seeking full-time employment or; 3) so discouraged that they have stopped looking for work, even though they are unemployed.

The Real unemployment Rate

The chart speaks for itself…If this is a “green shoot,” it must be a weed.

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • tony bonn

    good point about u-6 unemployment….but i disagree that a nation needs manufacturing…’s good for a well rounded self sufficient economy but hardly necessary….

    it’s not what one does but rather how profitable it is….a healthy economy is measured by its capital formation….employment directly follows capital investment and it hardly matters whether it is shoveling horse manure or building rockets….manufacturing has been destroyed because of capital destroying policies…until the fed is abolished it will be impossible to recover…..jobless recoveries are not recoveries at all but national self immolation.

  • rudy

    how can i see the had data for these stats?

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